Direct taxation: The European Commission
takes steps against the United Kingdom as regards the deductibility of
cross-border pension contributions

The European Commission has
formally requested the United Kingdom to amend its legislation which in certain
circumstances, denies deductibility of pension contributions paid to pension
funds established outside the United Kingdom. The request takes the form of a
reasoned opinion (second step of the infringement procedure of Article 226 of
the EC Treaty). If no satisfactory reaction to the reasoned opinion is received
within two months, the Commission may decide to refer the matter to the Court of
Justice of the European Communities.

The reasoned opinion adopted by the Commission concerns the income tax rules
which deny workers established in the UK the right to deduct pension
contributions they pay to pension funds established elsewhere in the EU or the
EEA from their UK taxable income. UK legislation denies such deductibility if an
overseas pensions fund does not provide certain information to the UK tax
authorities. In particular, the UK requires information on the date that the
pension is to start to be paid to an individual and on the capital value of the
pension. The denial of deductibility particularly affects cross-border workers
who move to the UK whilst continuing with a pension fund established in their
state of origin.

The Commission is of the opinion that the UK should allow deductibility for
all pension contributions paid by resident taxpayers to funds established in
other EU and EEA Member States as is the case for similar contributions to
domestic pension funds. In cases where the foreign pension provider is unwilling
or unable to provide the required information, the non-deductibility of the
contributions may in practice oblige the mobile worker to replace his foreign
pension scheme with one provided in the UK in order to be eligible for a tax
deduction in the UK. A person resident in another Member State may thus be
dissuaded from exercising his right of free movement by taking up employment in
the UK.

Furthermore, the information requirements constitute a costly formality,
particularly for foreign pension providers that do not wish to enter the UK
market but merely provide services to existing scheme members who have exercised
their right of free movement.

Consequently, the Commission considers that the United Kingdom's legislation,
in its current state, is not compatible with Articles 39, 43 and 49 EC Treaty
and Articles 28, 31 and 36 of the EEA Agreement.

The Commission's reference number for the case at issue is 2005/2320.

For the press releases issued on infringement procedures in the taxation or
customs area see: